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Rebuilding an industry

TORONTO, Ont. - The mood at this year's Ontario Trucking Association convention was refreshingly optimistic, as some of the most influential fleet executives and suppliers from across Canada came together to share ideas and lick their wounds...

TORONTO, Ont. – The mood at this year’s Ontario Trucking Association convention was refreshingly optimistic, as some of the most influential fleet executives and suppliers from across Canada came together to share ideas and lick their wounds following one of the most challenging periods of the industry’s history. While news reports remain a source of ominous forecasts and troubling prognostications, fleet managers are reporting improved profitability where the rubber meets the road.

“The reality is, business ain’t bad,” said Steve Russell, chairman and CEO of Celadon Trucking Services. “Pricing is based on supply and demand and the supply is going away.”

Rick Gaetz, president and CEO of Vitran Corp. agreed, adding “I think the fall (season) has been okay, both in the US and in Canada. It hasn’t been terrible.”

And Greg Rumble, president and COO of Contrans Group, said while current conditions are not as favourable as in 2008, they represent the new reality for the foreseeable future – so, you better get used to it.

“We are kind of walking along the bottom of the economy,” Rumble said. “There will be ups and downs but I don’t think we’ll see any significant increases over the next few years and we just have to deal with that.”

Speaking as part of a panel moderated by CBC business correspondent Amanda Lang, the trio of trucking tycoons expressed optimism that declining capacity was compensating for sluggish freight growth, allowing carriers to focus on improving their margins.

“So much capacity has gone away or is going away,” Celadon’s Russell said, noting in the US, the 25 largest truckload fleets control about 8% of the industry’s capacity and the remaining 92% is “collapsing.” This theory was supported by John Larkin, managing director of Stifel, Nicolaus, who said at the OTA convention that the truckload industry has shed 20% of its capacity through the recession, three-quarters of that as a result of fleets downsizing.

While a shortage of qualified drivers and the strict CSA enforcement regime are oft-cited sources of the capacity crunch, Russell highlighted another contributor.

“In 2006, it cost $95,000 (for a new tractor). In 2011, a new tractor costs $125,000-$130,000,” Russell said. “If you look back to 2006, you could trade a three-year-old tractor worth $50,000 for a new one that cost $95,000 and you needed a $45,000 mortgage; it was easy to get. Now, if you trade in a six- or seven-year-old truck, it’s worth $15,000-$20,000 and to buy a $125,000 truck – you can’t get the mortgages. So, you trade in three or four (trucks) to get one; so a 100-truck fleet is now a 60-truck fleet.”

The high cost of new trucks coupled with the escalating prices of components like tires (up as much as $200 per tire in the last six months, according to Gaetz), are keeping fleets from adding capacity and raising the barriers of entry for new players. It is also creating ideal conditions for further consolidation, carrier executives agreed.

“It’s a great time to be looking for acquisitions,” said Contrans’ Rumble. “You get a chance to see what the company was able to do through the toughest economic times in 25 years. If the company has done reasonably well in the 2008-2010 period, I’m willing to pay for that.”

Added Gaetz: “We will never buy off your next 12 months, we will always buy off your last 12 months.”

With fleets struggling to find qualified drivers, Russell said Celadon recently completed an acquisition primarily to secure a pool of experienced drivers. Celadon bought the dry van division of Dallas, Texas-based Frozen Food Express for close to $15 million and while it took over the company’s assets and customer base, it was most eager to secure its driving force. Of the 290 drivers employed by Frozen Food, 140 were offered jobs with Celadon and about 120 accepted. It may seem a high price to pay for qualified drivers, but the panelists agreed the driver shortage is not going away. They also agreed, for the most part, that driver wages must improve.

“There’s no question driver wages have to and will continue to go up if this industry is going to attract the right number of professional qualified drivers,” said Gaetz. “Wages are going up, but there will be a lull here. It’s going to take some time.”
Contrans’ Rumble said the method of pay is also likely to change – eventually. “How many industries out there are still paying piecework?” he asked. “That’s in effect what we do; all our work is piecework and there are not many industries left that pay that way.”

With razor thin profit margins at even the best run trucking companies, it’s obvious any widespread increase in driver wages will have to be generated through higher rates. Will shippers be willing to accept cost increases as capacity tightens? Celadon’s Russell has worked out the typical profit his customers earn on a truckload of goods and figures a modest rate increase should not be difficult to absorb. He said the average truckload hauled by Celadon contains $75,000 worth of product and the shipper typically makes $15,000 profit on those goods. With a rate of $1.50 per mile and a 900-mile average length of haul, Russell calculated a 5% rate increase would cost a shipper just $60 a load, which would hardly eat into its $15,000 profit.

Gaetz said it’s incumbent on carriers to educate their shippers on why rate increases are necessary and he advised them to “draw a picture” they can leave with traffic managers, who will then have something tangible to show actual decision makers higher up the chain of command.

“If you leave nothing, you will get nothing,” Gaetz said.

Celadon’s rates have gone up 4.5% over the past year, and Russell said “I think as an industry, if our rates don’t achieve increases in the 4-5% per year range, profits are going to get pretty tough to make.”

Given the wage and cost pressures facing the industry, Vitran’s Gaetz figured companies will need rate increases more to the tune of 6-7% to remain profitable.

Carriers may also have to consider applying additional accessorial charges for things like traffic and weather delays.

“The industry is going to have to keep finding ways to recover costs that have become embedded in the way we do business,” said Gaetz, noting some US truckload carriers are now levying ‘city surcharges’ when delivering into gridlocked urban centres.

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